Introduction
With the passage of time, investment choices have become more and more complicated. Investment controlling is an important sector of an economy which is determined in large part by the valuation of risks. For the purpose of lowering the risk, Markowitz (1952) introduced the concept of diversification of securities in a portfolio. Thus one can get the benefit of risk aversion to reduce the risk by making a portfolio consisting of different securities. How individual approach to the specific type and nature of risk has been a rising discussion. Sensitivity of risks also depends upon number of other factors such as source of information, degree of individual’s knowledge towards risk and market unpredictability (Diacon, 2004). Another study reveals that individuals also differ in risk taking capacities and risk acceptance (Bosner and Lakehal-Ayat, 2008).
In addition to risk and uncertainty, individuals also dependent on cognitive biases while making financial decisions (Keil et al., 2007). Personality traits consists of combination of different emotional and motivational characteristics that influences in way individuals respond to his environment and make decisions (Dole and Schroeder, 2001; Smith, 1999a). Investor’s personality traits, personal values, emotions and societal influence play an important role in risk aversion and making financial decision. Studies shows that these factors plays a magnificent role in determining the price of securities along with other economic factors (Smith and Harvey, 2011; Shiller, 2002). Big five important personality traits model namely extraversion, openness, agreeableness, conscientiousness and neuroticism developed by McCare and Costa (1997)
Durand et al (2013) in their study ...
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Feist, J., & Feist, G. J. (2009). Theories of Personality (7th ed.). New York, New York: McGraw-Hill.
Personality is massive part of an individual’s identity. Our personalities dictate our patterns of thinking, feeling, and acting. An individual’s personality exposes them to predispositions and habits that influence their actions and lives. Early on, personality assessments consisted of physical features ranging from head shape and facial characteristics to body type. In today’s world, personality assessments are mainly based around traits. Traits are simply descriptions of one’s habitual patterns of behavior, thought and emotion. The most popular personality assessment is the Five-Factor Model, also known as The Big Five. This model allows us to describe people based on the five main traits/dimensions. These traits are extraversion, agreeableness, conscientiousness, neuroticism, and openness to experience. Each of these five traits measures a different aspect of one’s personality. Extraversion is based on one’s level of engagement with the world,
A person’s personality has been the subject of psychological scrutiny for many years. Psychologists have drawn up several theories in an attempt to accurately predict and determine one’s personality. Foremost amongst these, is the “Big Five Trait Theory” which stemmed from Raymond B. Cattell’s theory.
Schultz, D. P., & Schultz, S. E. (2013). Theories of personality (10th ed.). Belmont, CA: Cengage/Wadsworth.
Investment theory is based upon some simple concepts. Investors should want to maximize their return while minimizing their risk at the same time. In order to accomplish this goal investors should diversify their portfolios based upon expected returns and standard deviations of individual securities. Investment theory assumes that investors are risk averse, which means that they will choose a portfolio with a smaller standard deviation. (Alexander, Sharpe, and Bailey, 1998). It is also assumed that wealth has marginal utility, which basically means that a dollar potentially lost has more perceived value than a dollar potentially gained. An indifference curve is a term that represents a combination of risk and expected return that has an equal amount of utility to an investor. A two dimensional figure that provides us with return measurements on the vertical axis and risk measurements (std. deviation) on the horizontal axis will show indifference curves starting at a point and moving higher up the vertical axis the further along the horizontal axis it moves. Therefore a risk averse investor will choose an indifference curve that lies the furthest to the northwest because this would r...
Schultz, D.P. & Schultz, S.E. (2009). Theories of Personality, Ninth Edition. US: Wadsworth Cengage Learning.
The study of personality traits is beneficial in identifying the many variables that exist from human to human; the combinations of these variables provide us with a true level of individuality and uniqueness. In the field of psychology, trait theory is considered to be a key approach to the study of human personality (Crowne, 2007; Burton, Westen & Kowalski, 2009). This paper aims to identify a number of significant contributors who have played crucial roles in both the development and application of trait theory. This paper then moves focus to these theorists, outlining their theory and analysing both the strengths and weaknesses of those theories. An illustration of the methods used in trait measurement is given and includes the arguments both for and against such procedures. Lastly the findings of trait theory and its components described within the paper will be summarised.
Howells, Peter., Bain, Keith 2000, Financial Markets and Institutions, 3rd edn, Henry King Ltd., Great Britain.
According to Investopedia (Asset Allocation Definition, 2013), asset allocation is an investment strategy that aims to balance risk and reward by distributing a portfolio’s assets according to an individual’s goals, risk tolerance and investment horizon. There are three main asset classes: equities, fixed-income, cash and cash equivalents; but they all have different levels of risk and return. A prudent investor should be careful in allocating each asset class to his portfolio. Proper asset allocation is a highly debatable subject and is not designed equally for everybody, but is rather based on the desires and needs of the individual investor. This paper discusses the importance of asset allocation, the differences and the proper diversification within the portfolio.
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Feist, J., Feist, G. J., & Roberts, T. A. (2009). Theories of personality. New York:
Our understanding and the concept of investment in behavioural finance combines economics and psychology to analyse how and why investors make final decision. As an investor one’s decision to invest is fully influence by different type of attitudes of behavioural and psychological ( Ricciardi & Simon, 2000). Yet, in order to maximize their financial goal, investors must have a good investment planning. Furthermore , to gain a good investment planning , there must be a good decision making among investors. They have to choose the right investment plan I order to manage the resources for different type of investments not only to gain profit wise but also to avoid the risk that occur from investment.